Treasurys slip as traders keep eye on Fed

NEW YORK (MarketWatch) — U.S. Treasury prices fell Wednesday, ending a three-day streak of gains and pushing up yields amid an auction of five-year notes and continued uncertainty over how the Federal Reserve will eventually begin to normalize interest rates.

The yield on the benchmark U.S. 10-year Treasury note
US:10_YEAR
rose 4 basis points to 2.565%. Yields rise as prices fall. The two-year note yield
US:2_YEAR
edged higher to 0.582%, while at the long end of the curve, the 30-year Treasury bond yield
US:30_YEAR
rose nearly 3 basis points to 3.277%.

Bloomberg News

Cleveland Fed President Loretta Mester is scheduled to speak Wednesday.

Analysts said assessments of the Fed’s intentions after a kneejerk selloff in the wake of last week’s statement by the central bank remain a market driver. The market has yet to fully reflect the Fed’s forecasts for future interest-rate rises, with investors instead keeping watch on economic data.

“If the economy pans out as the Fed expects, yields at the front end, at least, will probably rise, if only because the implied rate path priced into the market is shy of that suggested by the Fed’s forecasts,” said Steven Barrow, currency and fixed-income strategist at Standard Bank, in a note.

“We think this will also lever longer-term rates up. However, this increase should be modest — unless the Fed (and the market) is caught out by much higher inflation, which we doubt,” he said.

Here is what else bond investors were watching:

The Treasury sold $35 billion of five-year notes, receiving $2.56 in bids for every $1 of supply on offer, the weakest cover ratio this year, according to The Wall Street Journal.

The Ifo index, a closely-watched measure of German business confidence, fell in September to its lowest level in more than a year. The index came in at 104.7 versus 106.3 in August, the lowest reading since April 2013 and well below the 105.8 predicted by analysts in a Wall Street Journal survey.

Sales of new single-family U.S. homes surged 18% in August to a stronger-than-expected seasonally-adjusted annual rate of 504,000, the fastest pace in more than six years, government data showed Wednesday.

In a speech, Cleveland Fed President Loretta Mester, a 2014 voting member of the rate-setting Federal Open Market Committee, said the economy is returning to more normal territory and reiterated her call for the central bank to scrap its forward guidance that says rates will remain low for a “considerable time.” Even though the Fed has made clear the guidance is contingent on the performance of the economy, it “tends to focus the public’s attention on a calendar-time for liftoff rather than on the changes in economic conditions that will help determine changes in appropriate policy,” she said.

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